Circular No. 11/00 - The Development Of Closed Policy Years; Development of Open Policy Years; Premium Rating for the 2001 Year
NOVEMBER 24, 2000
CIRCULAR NO. 11/00
TO MEMBERS OF THE ASSOCIATION
DEVELOPMENT OF CLOSED POLICY YEARS
DEVELOPMENT OF OPEN POLICY YEARS
PREMIUM RATING FOR THE 2001 YEAR
At its recent meeting in Hamburg, your Board of Directors reviewed the status of both closed and open policy years and established parameters for the renewal of entries with the Club for the year commencing February 20, 2001. The remainder of this Circular describes recent developments in these areas and explains the Club’s requirements for the forthcoming renewal.
Closed Policy Years
These years continue to develop well. At the end of the quarter to September 30, 2000, the Club’s contingency fund had grown to $41.3 million, a record figure. Moreover, there are grounds for cautious optimism that the fund may have increased yet again by year end, given the likely continuing reduction, albeit at a slower pace, of claims reserves on older policy years.
1997 Policy Year
This year now stands in modest surplus, having shown improvement over the period to the end of the third quarter. It is intended that the year be closed without further call during the first half of 2001.
In the interim, the Release Call margin remains at 25% of the Advance Call over and above the Supplementary Call already levied for the year (25%) – i.e. 50% in total.
1998 Policy Year
This year has also recently improved. Although it remains in deficit, investment income yet to be allocated to the year, in addition to a reasonable expectation - in line with previous experience – that claims totals may yet again reduce over time, create circumstances where it is at present considered unlikely that any further call will be required.
The Release Call margin remains at 25% of the Advance Call over and above the Supplementary Call already levied for the year (25%) – i.e. 50% in total.
1999 Policy Year
This year continues to show a deficit, although it is encouraging to note that there was a substantial decrease in outstanding claims (including IBNR) during the third quarter of 2000 and that loss emergence over the previous nine months had also declined.
As in the case of its predecessor year, only an incomplete allocation of investment income has so far been made. At the same time, the hope remains that current claims reserves may continue their presently declining trend. Accordingly, and given the very substantial size of the Club’s contingency fund, it is not at present expected that a further call will be required for this year.
In the meantime, the Release Call margin remains at 25% of the Advance Call over and above the Supplementary Call already levied for the year (25%) – i.e. 50% in total.
2000 Policy Year
Although the 2000 policy year is immature, the comments made in regard to 1999 – including the caveats concerning investment income and ultimate claims volume - can also be made in respect of the current insurance period. Nevertheless, the year is presently in underwriting deficit and may in time require support from reserves. However, there are signs that some deterioration may be due to an acceleration in the payment of claims rather than a disproportionate increase in total exposure.
Given these factors, your Board has ordered that the 25% Supplementary Call originally estimated for the year be levied as of December 31, 2000 for payment on May 20, 2001 in the ordinary way. Members can expect to receive debit notes, for prompt payment on that date, over the coming weeks.
The year will be kept under review and further reports will be made on its development in due course. The Release Call margin for the 2000 policy year remains at 25% of the Advance Call over and above the Supplementary Call level (25%) for the year (i.e. 50% of the Advance Call in total).
Premium Rating for the 2001 Policy Year
As widely discussed within the P&I industry – both by the shipping press and by reference to virtually all clubs’ recent annual reports – the past several years have seen a relentless reduction in rating levels. Although falls in pricing have not been as precipitate as those featured in the hull and machinery sector, they have nevertheless led to the almost universal development of underwriting deficits on recent policy years. However, and as will be evident from the comments contained in the earlier part of this Circular, it should be a source of comfort to American Club Members that its performance in this respect has been highly creditable in comparison with many of its competitors.
Nevertheless, the fact remains that uneconomic premium rating cannot be sustained over the long term since reliance upon contingency or reserve funding has obviously limited possibilities, while the subsidy of underwriting deficits through investment returns is equally unreliable.
In short, there is a clear and present need to return premium rating to levels more in line with current and expected claims exposure. Having said that, and given the Club’s robust underlying financial health, your Board is sensitive to the desirability of going forward in as measured and gradual a pace as possible in raising levels of premium funding overall.
Accordingly, it has been determined that, for the renewal of P&I, FD&D and Charterers’ entries with the Club for the forthcoming policy year, a general increase of 10% be levied on all expiring premiums with effect from February 20, 2001. Following the application of this general increase, further adjustment to rating and/or terms will be made to take account of an individual Member’s record with the Club.
As is the case for the current policy year, the Supplementary Call requirement for mutual entries will remain at 25% of the Advance Call for 2001. The Release Call margin for the forthcoming policy year will also remain at 25% over and above the Supplementary Call level – i.e. 50% of the Advance Call in total.
Again as in previous years, the Advance Call for mutual entries will be debited in four equal installments due February 20, May 20, August 20, and November 20. Prompt payment on those dates is expected.
Cover limits for the 2001 policy year will remain the same as those which apply to the current period, i.e. $1 billion for claims in respect of oil pollution and, for non-oil pollution claims, the limit established in accordance with the formula based on ship limitation funds under the 1976 London Convention as set out in Rule 4, Section 10 of the Club’s Rules.
If any Member has any questions, or requires further explanation, in regard to the foregoing, the Managers will be pleased to respond.
Joseph E.M. Hughes, Chairman & CEO
Shipowners Claims Bureau, Inc., Managers for THE AMERICAN CLUB